A construction bond is a type of surety bond. A surety bond is a three-party contract that includes the surety (company that guarantees performance); the principal (contractor); and the obligee (owner). The Principal promises to perform its contract obligations to the obligee (owner), and the surety guarantees the principal’s performance of its obligations by paying the obligee if the principal fails to meet its obligations. Surety bonds used in construction are called contract surety bonds.

There are 3 types of contract surety bonds:

1. Bid Bond. A bid bond provides financial protection to an obligee (owner) if a bidder is awarded a contract based on bid documents, but fails to sign the contract and provide the required performance and payment bonds. The bid bond helps screen out unqualified bidders and is an important part of the competitive bidding process on some construction projects.

2. Performance Bond. A performance bond protects the obligee (owner) from financial losses if the contractor fails to perform the construction contract according to its terms. If the obligee (owner) declares the principal (contractor) in default and terminates the construction contract, the obligee can demand the surety meet the surety’s obligations under the terms of the bond.

3. Payment Bond. A payment bond guarantees the contractor’s payment of subcontractors and material suppliers.

In Mississippi, construction bonds are a critical component of the construction industry, serving as a risk management tool to ensure project completion and financial security. The state statutes and federal law, including the Miller Act for federal projects, mandate the use of these surety bonds in various circumstances. A bid bond ensures that a contractor awarded a project will enter into a contract and provide the necessary performance and payment bonds. A performance bond safeguards the project owner from losses if the contractor fails to fulfill the contract terms. Lastly, a payment bond guarantees that the contractor will pay subcontractors and suppliers. These bonds provide a form of insurance for the project owner (obligee) by transferring the risk of contractor default to a surety company. Contractors in Mississippi are often required to obtain these bonds before commencing work on public projects, and sometimes private projects, to protect the interests of project owners and ensure the reliability and financial integrity of the contractors engaged in the construction process.